Settlement discount
A settlement discount is a reduction offered for paying an invoice early, recorded only if and when the customer actually takes it up, unlike a trade discount, which is deducted before recording and never recorded at all.
See it move
A comparison contrasts two payment dates on the same €2,000 invoice, offered on terms of 2/10, net 30. Paying on day 8, inside the 10-day window, earns a 2% settlement discount of €40, so only €1,960 cash changes hands. Paying on day 25, after the window closes, forfeits the discount entirely, and the full €2,000 is due, with no discount entry recorded.
The formula
Variables
- Amount paid, if the discount is taken within the window (€)
- Original invoice amount (€)
- Settlement discount rate (%)
Applies only when the customer pays within the discount period; otherwise the full invoice amount is due and no discount is recorded.
Check yourself
A supplier invoices a customer €3,500 with credit terms of '3/15, net 45' — a 3% discount if paid within 15 days, full amount due within 45 days. The customer pays on day 40. How much cash does the supplier receive, and should a settlement discount be recorded?